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EquityChamp

People will think stock market is a casino spot or gaming spot when they loose money from it or hear from others of such losses. But in reality if you can spot on the reason for any stock to move, up or down, then you should be not making any losses at all. What are the reasons possibly could influence a move of a stock?

Broadly we can identify three main reasons for witch a stock can move, both ways.

a) Performance of the companyb) Speculationc) Manipulation

Performance driven movementThis is broadly the summary of the end result of a company's core business activity. For example if we take a manufacturing company their core business is producing and marketing product or range of products. Then when this product is gaining popularity in the market and increase the sales continuously the producing company generates increasing revenues which results increase in profits. When profits are increasing their EPS will grow and the PE ratio of the share price will come down. A possible investor who sees on this scenario will understand the intrinsic value of the company and will identify its actual value is actually higher than current value and so decide to buy the stock. When more people starts doing this automatically the demand for that stock increases will lead the stock price to move upwards which result the stock's PE ratio to up as well. The same scenario will reverse if the company's performance drops and then the demand for the stock decreases while the supply will increase due to more investors tend to exit from the stock and the price will move to down wards. PE ratio will follow.

Speculation driven movementThis is the movement of a share based on the investor's perception of some future activity. Investor will analyse and take a view on future event and will link the possible outcome of that to the company's/stock's performance. If he thinks the outcome will going to be favourable for the company then the company can increase their revenue or reduce cost and thereby increase profits so that the stock price should move high. Then that speculator will buy into the stock. If more investors believe in the same way then they too will try to buy it which will increase the demand for the stock and the stock will move upwards. The same scenario reverses when the outcome of the future event is deemed negative for the company's future performances. Examples for this type of movement are;a) Future tax changes on corporate profits by Government b) Certainty of an stock market index to reach a certain level, higher or lowerc) Merger or acquisition plan of a companyd) Expectation of a better dividend e) Strategic deal with a strategic investorf) Opening-up or closing-down of a market or markets for the company's products or services, etc.

Manipulation driven movementThis is the movement of a share that results from an intentional activity of a person or group of persons. Here the manipulator only knows the reason to move a stock and the same person or group of persons knows the end point of such a movement. That is the danger of this type of movement. This can happen outside the company as well as inside the company. Examples for outside manipulation are;a) Person or group of persons will get together and identify a share that can take high or low and then put big orders in the order book as well start buying or selling. Upon reaching the desired target they exit/entry from/to the stockb) Spread a false information that influence the crowd to think that a particular stock will move to a certain level after buying/selling the same stock already. The crowd will act based on the information and finally the manipulator to reach their targets.Examples for inside manipulation are;a) A company manipulates its financials good or bad and inflated/depressed its share price followed by a huge sale or buy of the significant stake of the company at the desired levelb) spread falls information on the company itself and influence the crowd to act on it.

Among these three reasons the most sure and profitable one is performance driven movement which is very logical and reasonable. But to do that the investor should have good skills on analysis, timing as well as patience and of course the holding power. The master of this is Warren Buffet and you know how he invest and we have never heard of looses for him even within the US market crash happen in 2008-10 period.

Speculation driven movement have mix results where the success is driven on the accuracy of the speculation by the speculator. The actual can go either way. But anybody who master it can really win. One of the person who are very good at this is George Soros.

The manipulation driven movement is the most dangerous and that's where most of the investors have lost their wealth. In more than 90%-95% of the cases the mass crowed who are victims to manipulation have lost money because 90%-95% of the cases the manipulator run away with public money.

So now my dear friends try to maximise your returns from stock market by becoming a performance-driven investor rather than become a beggar by being a victim of a manipulator. Remember now CSE is increasingly becoming a trading market than an investing market so manipulators are popping up like mushrooms. You have the capacity to safeguard yourself but no other can protect you.

Lets talk about the dimensions of valuations. Please get a pen and piece of paper because you have to work out sum.

A share can be valued either based on its earnings (cash flow) or assets (net assets). The main dimension using earnings is PE ratio ( net present value of future cash flows in case you use cash flows) and the main dimension using assets in PBV ratio.

To value a share using PE ratio I would use the following yardsticks.a) QoQ revenue growth and YoY revenue growthb) Gross profit margin and net profit marginc) QoQ and YoY revenue growthd) ROE (profit attributable to shareholders/average equity)e) PE ratio and the comparable industry PE ratio

Now you can workout the above and let me know what you think. Below is the two threads I did containing most of the data you need to compare your above two stocks. But avoid speculative stories here. Just objective comparison. This should be a good learning for you.

reyaz

Manager - Equity Analytics

Posts : 196Equity Stars : 2816Reputation : 6Join date : 2011-03-10

Couldn't agree more, this post was informative. If you let me add one more reason why shares are bought is to get information about the company. Specially competitors buying other player's shares to get information about the company.